A Correspondent
GUWAHATI: The Reserve Bank of India (RBI) on Wednesday announced an increase in the benchmark repo rate by 25 basis points to 5.50% from 5.25% to tackle rising inflation, which moved beyond the 4% target. The increase marks the first repo rate hike by the central bank in nearly four years.
With the increase, consumers and borrowers will need to shell out more for goods/services and in loan EMIs, respectively. Let us understand the economics behind the repo rate and how it impacts the banks, markets, and consumers, especially the salaried middle class.
What is repo rate?
In simple terms, the repo rate is the interest rate at which the RBI lends short-term money to commercial banks. An increase in the repo rate means that the borrowing banks have to pay more to the RBI during repayment.
How does it impact the consumer?
Once the repo rate is increased, the borrowing banks pass most of the added burden to the consumers by either hiking the loan interest rates or increasing the payment tenure. In both cases, the borrower will pay more.
The salaried middle class is the worst-hit, as most of the essential goods and commodities, like houses, vehicles, and other urgent requirements, are often met by this category with home loans, vehicle loans, and personal loans.
As an example, with the current increase in the repo rate by 25 basis points, a person who would have paid a total interest of Rs 54,13,840 on a loan of Rs 50,00,000 at the rate of 8.50% for a tenure of 20 years will now have to pay a total interest of Rs 56,04,400, which is an increase of Rs 1,90,560.
Why is repo rate increased or decreased?
The RBI, as the central bank of the country, changes the repo rate to keep the inflation rate in check. When the inflation rate is higher, the RBI aims to 'bring back the money' in the market and decrease the demand for goods/services.
Once interest rates on loans are increased, consumers postpone their purchase plans for later, which decreases the demand for the product and subsequently reduces their price, thus keeping inflation in check.
Apart from rising inflation, the current repo hike was fuelled by spiking crude oil prices amid unrest in the Middle East and a weaker rupee. However, the strong GDP growth projections for FY27 at 7.1% allowed the RBI some flexibility while increasing the repo rate.
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